NPS scheme: 5 reasons to opt this pension plan for better return with minimum risk

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NPS scheme: The National Pension System (NPS) is a unique pension plan backed by the Government of India, which provides both equity and debt exposure in single investment. Giving flexibility to NPS account holders in regard to debt and equity exposure, it provides an element of trust to the investors because it is backed by the government. This pension plan also promises a monthly pension post-retirement.

Speaking on the reason for NPS scheme gaining popularity among investors, Ajit Kumar, Chief Strategy Officer at KFintech said, “One of the reasons NPS is growing in popularity is its highly simple and flexible nature. The fact that the NPS is a voluntary contribution system gives everyone who wants to invest in it an opportunity to do so.”

On recent GoI’s moves that may make NPS scheme more lucrative, SEBI registered tax and investment expert Jitendra Solanki said, “Recently GoI has raised the FDI limit in pension fund from 49 per cent to 74 per cent. It has also accepted the PFRDA proposal to allow pension funds to invest in IPOs as well. These initiatives are going to help NPS account holders in long term.”

On reasons that may attract investors to opt this pension plan for a better return with minimum risk involved, Ajit Kumar of KFintech listed out the following 5 points:

1] Freedom of investment: You can contribute once at any time of the year, or you can do so every month. The minimum contribution required per annum for Tier 1 and Tier 2 accounts is 500 and 1000 respectively. You can also change your investment amounts, as long as they are above the prescribed minimum amounts.

2] Element of trust: NPS also comes with the advantage that you can only ever have one NPS account, which means that even if you end up changing jobs or relocate to a new city, your NPS account goes with you. Being a government backed scheme, there is an element of trust associated with the NPS making it that much more appealing. With oversight and regulation by the PFRDA, the entire setup is very transparent and allows you to monitor and review the performance of your investment constantly. NPS is also planning to launch a new product within 6-8 months, which may help settle the debate on assured returns.

3] Freedom to choose your fund manager: After you start investing, you can also choose where your money is invested and who manages it. If you are unhappy with the fund manager, you can change them once a year. If you’re not happy with how things are going and if the returns you see don’t live up to your expectations, you can switch between investment options twice a year. Younger people are usually willing to take more risks, seeking higher returns on their investment, and the willingness to make risky investments reduces with age. For people who do not mind higher risks, NPS lets you invest up to 75% of your corpus in equities. For people on the other end of the scale, who want their returns risk-free, there’s the option to invest all of their corpus in Government securities.

4] Income tax benefit: Investing in the NPS can give you tax benefits of up to 2 lakh under various sections. It is true, however, that the monthly pension you earn from your annuity is taxable, but similar problems exist with other pension plans as well. For example, with EPF, once you receive your final settlement, you will need to invest it elsewhere and the returns on those will also be taxable.

5] Promise of a monthly income post-retirement: After your retirement, you can withdraw up to 60 per cent of your total corpus as a lump sum, with the other 40 per cent being used for an annuity plan as mentioned earlier. The lump sum withdrawn after retirement is tax-free too. Though NPS does not guarantee any percentage returns on your investment, it does guarantee that there will be a pension at a later point in time. Since all of this is made possible because of your own contributions to the NPS, it avoids an undue financial burden on the government, which does not have to contribute.

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